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DIW Weekly ReportEconomy. Politics. Science.
A policy bulletin from the German Institute for Economic Research
201937
DIW Economic Outlook
326 Editorial by Claus Michelsen et al.
Growth program needed as the foundation of the German economy crumbles
328 Report by Claus Michelsen, Guido Baldi, Geraldine Dany-Knedlik, Hella Engerer, Stefan Gebauer, Malte Rieth, and Thore Schlaak
The global economy and the euro area: uncertainty weighing on world trade and industry
330 Report by Claus Michelsen, Marius Clemens, Max Hanisch, Simon Junker, Konstantin Kholodilin und Thore Schlaak
German economy: a recession is not automatically a crisis
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Volume 9 September 11, 2019
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DIW Weekly Report 37 2019
AT A GLANCE
Growth program needed as the foundation of the German economy crumblesBy Claus Michelsen et al.
• Weak foreign trade is weighing on the export-oriented German economy: DIW Berlin is forecasting GDP growth of 0.5 percent this year and 1.4 percent per year in 2020 and 2021
• Brexit, the US-China trade disputes, and the Iran conflict are negatively affecting the global economy; global growth only 3.7 percent this year
• In Germany, marked fiscal stimuli and positive labor market developments are preventing the economy from sliding into a more serious crisis
• High government surpluses are dwindling: public surplus is expected to grow by 48 billion euros this year and 33 billion euros next year
• In the long term, an investment agenda is necessary to keep Germany competitive as a business location and to encourage companies to invest
MEDIA
Audio Interview with Claus Michelsen (in German) www.diw.de/mediathek
FROM THE AUTHORS
“Germany is in a technical recession. However, thanks to strong private consumption
and the continuing good situation on the labor market, this will not turn into a crisis
in the short term. In order to successfully stabilize the German economy over the long
term, a policy geared to strengthening potential growth is necessary. This will encourage
companies to invest and increase Germany’s competitiveness.” — Claus Michelsen —
Fiscal policy stimuli and positive employment development are supporting private consumption and thus the German economyGrowth contributions of the individual components of GDP in percentage points
−3
−2
−1
0
1
2
3
4
5
20212014 2015 2016 2017 2018 2019 2020
Consumption Investments Exports Imports Year-on-year GDP growth in percent
Forecast
© DIW Berlin 2019Source: Authors’ own surveys and calculations.
2.2
1.72.2
2.5
1.5
0.5
1.4 1.4
326 DIW Weekly Report 37/2019
Germany’s economic foundation is crumbling. Industrial pro-
duction, especially in the exporting sector, has been experi-
encing a significant decline in output for a year now. Demand
from within Europe is lacking in particular, especially from
the United Kingdom and Italy. In contrast, exports to East
Asia have remained stable despite the escalating trade con-
flicts between Washington and Beijing. This development,
coupled with strong domestic demand, saved Germany from
slipping into a recession at the end of 2018 and beginning of
2019. Private households markedly increased consumption
due to fiscal measures introduced in the beginning of the
year that increased income (such as splitting health insur-
ance costs between employers and employees equally and
an increase in children benefits). Companies also invested
heavily in expanding their production capacity in the first
quarter and the construction industry again reported record
order backlogs. For this reason alone, DIW Berlin is still
expecting economic growth of 0.5 percent this year. Pro-
vided the significant political risks do not materialize, the
projected growth rates of 1.4 percent for 2020 and for 2021,
respectively, are around the long-term average.
However, the foundations of growth in Germany have
cracked considerably, primarily due to serious economic
risks. In addition to the continuously escalating trade conflict
between the US and China, there are problems in Europe
weighing on the economy. Trade with the United Kingdom
is already substantially weaker and exports to Ireland have
decreased significantly over the past six months. If a no-deal
Brexit occurs, this would drag down growth rates by 1.1 per-
centage points in the UK, 0.2 percentage points in the euro
area, and 0.4 percentage points in Germany over the coming
year. In Italy, the economic crisis and issues with the previ-
ous government in the months ahead also left their mark on
overall growth.
These uncertainties and conflicts are weighing on demand
for capital goods and thus are negatively affecting Germany
in particular. Entrepreneurs in Germany seem to be losing
confidence as well: In the second quarter, private invest-
ment in new machinery, equipment, and vehicles plum-
meted. Unemployment figures were falling until the spring
and employment was growing, but both have now almost
reached a standstill. The domestic economy does not seem
to be able to permanently decouple itself from weakness in
the industrial and export sectors. It is therefore likely that the
German economy slipped into a recession over the summer
months.
However, the Grand Coalition’s expansive fiscal policy has
kept the crisis from becoming worse. Financial measures
from the coalition pact will provide substantial economic
stimuli this summer and will take effect at the turn of the year
in both 2019 and 2020. These measures include, for exam-
ple, pension increases, an increase in children benefits, and
partially abolishing the solidarity tax. Overall, these addi-
tional stimuli from measures agreed upon in the coalition
pact will amount to a good 15 billion euros in 2019, ten billion
euros in 2020, and almost 17 billion euros in 2021. Compared
to the previous year, there will be an additional 2.6 billion
euros, 2.1 billion euros, and 2.5 billion euros in 2019, 2020,
and 2021, respectively, available for investments, such as in
the expansion of the broadband network, the Digital Pact for
Schools, or the expansion of the Deutsche Bahn network.
The Federal Government is boosting growth in Germany by
0.3 percentage points per year.
However, the government has almost used up all availa-
ble fiscal measures. Its declared objective is a structurally
balanced budget over the long term. Initially, measures to
support consumption were prioritized and a policy aimed at
Growth program needed as the foundation of the German economy crumblesBy Claus Michelsen, Guido Baldi, Marius Clemens, Geraldine Dany-Knedlik, Hella Engerer, Marcel Fratzscher, Stefan Gebauer,
Max Hanisch, Simon Junker, Konstantin Kholodilin, Malte Rieth, and Thore Schlaak
EDITORIAL
DOI: https://doi.org/10.18723/diw_dwr:2019-37-1
327DIW Weekly Report 37/2019
EDITORIAL
such investments strengthen social cohesion. In addition
to improved competitiveness, the German business model
should be modified towards a growth model that is more
inclusive. This requires, for example, investments in housing
or better access to digital services in rural areas.
At present, there is a good opportunity to make up for these
disadvantages. The Federal Government can borrow in the
long-term at negative interest rates. However, the dogma
of preserving a balanced budget stands in the way of more
comprehensive debt financing. The “black zero” is not a
meaningful economic policy in its own right. However, mov-
ing away from it would only be a first step. In view of the scale
of the challenges and the historically low financing costs, it
would also be advisable to review the rules of the debt brake
to strengthen the foundations of the German economy in the
long term.
strengthening production potential was neglected for a long
time. It is only more recently that public investment has been
increased significantly and laws have been passed which,
for example, favor investment in research and development.
However, an economic policy focusing on long-term growth
is needed urgently in several respects. From an economic
point of view, the measures already adopted will help sup-
port demand in the short term. However, companies lack
confidence due to the many uncertainties; this is reflected in
lower levels of investment. On the one hand, a plan to invest
in long-term modernization would strengthen companies’
future prospects and directly increase their propensity to
invest. On the other hand, this is also urgently necessary
with regard to Germany’s competitiveness. In key areas such
as digitization, infrastructure, and education, Germany has
lost ground to other locations significantly. At the same time,
Claus Michelsen is head of the Forecasting and Economic Policy Department at
DIW Berlin | [email protected]
Guido Baldi is a guest researcher in the Forecasting and Economic Policy Department
at DIW Berlin | [email protected]
Marius Clemens is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Geraldine Dany-Knedlik is a research associate in the Forecasting and Economic
Policy Department at DIW Berlin | [email protected]
Hella Engerer is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Marcel Fratzscher is president of DIW Berlin | [email protected]
Stefan Gebauer is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Max Hanisch is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Simon Junker is deputy head of the Forecasting and Economic Policy Department at
DIW Berlin | [email protected]
Konstantin Kholodilin is a research associate in the Macroeconomics Department
at DIW Berlin | [email protected]
Malte Rieth is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Thore Schlaak is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
328 DIW Weekly Report 37/2019
WORLD ECONOMY
The global economy and the euro area: uncertainty weighing on world trade and industryBy Claus Michelsen, Guido Baldi, Geraldine Dany-Knedlik, Hella Engerer, Stefan Gebauer, Malte Rieth, and Thore Schlaak
ABSTRACT
The ongoing trade conflicts initiated by the US and the uncer-
tainty surrounding Brexit are negatively affecting the global
economy. Global trade and investment activity, and thus in
many places industrial output, are the areas most impacted.
Consumption, however, is continuing to support the economy
in many countries. DIW Berlin is expecting global GDP to grow
to 3.7 percent this year and to slightly less in the following two
years. Serious risks are weighing on the outlook, as the trade
conflicts could continue to escalate and spread to the EU and
the likelihood of a no-deal Brexit has increased.
The global economy maintained its rate of expansion in the second quarter of 2019 (Figure). Production expanded signif-icantly in many Asian countries while the economy in west-ern countries is losing momentum; economic output even decreased in the United Kingdom and Germany. In con-trast, consumption expanded dynamically in the US and in the euro area, but investment activity was weak.
The overall outlook has dampened. The global trade con-flicts, mainly initiated by the US but also between some Asian countries, and the political uncertainties in Europe are negatively affecting foreign trade and investment. Industrial output is sluggish in many places or has already declined. In addition, leading indicators suggest a further lull during the second half of the year. In the services sector, sentiment is dampened but remains good. Labor demand is mostly high and wage developments reflect this. Together with the recent drop in energy prices and generally stable financial conditions, consumers will likely remain in a buying mood.
In addition, various stimulating policy measures are coming into play: the federal funds rate was lowered in the US by a quarter of a percentage point in July and will likely be low-ered again this year. In response to the continuing low infla-tion, the European Central Bank has signaled its willingness to support the economy. No interest rate hike is expected in the euro area before the end of 2021. Fiscal policy remains expansionary globally. Additional public expenditure is immi-nent in China as well as in several European countries such as France and Spain.
Therefore, the slowdown in the global economy is likely to be only gradual. Demand for capital goods in particular is sluggish while consumption continues to support the econ-omy. The global economy is in a very advanced phase of the economic cycle. World production is expected to grow by 3.7 percent this year after increasing by 4.2 percent in 2018. Growth will be somewhat lower in 2020 and 2021 (Table). Compared to the Economic Outlook published in summer 2019, DIW Berlin is lowering its forecast slightly.
Risks are higher than usually, primarily due to the cur-rent high likelihood of a no-deal Brexit. In this forecast, it
DOI: https://doi.org/10.18723/diw_dwr:2019-37-2
329DIW Weekly Report 37/2019
WORLD ECONOMY
is assumed a no-deal Brexit will not occur. However, if it does, growth is likely to be significantly lower than forecast, especially in Europe. In the euro area, a hard Brexit would trim 0.2 percentage point off GPD growth in 2020 and 2021, according to estimates from an econometric model by DIW Berlin. The global trade conflicts are not expected to ease, and the risk that Europe will be directly subject to US tariffs remains. Escalating trade conflicts and a no-deal Brexit would weigh on already weak global trade and subdued corporate investment activity. The political uncertainties in Italy have diminished for now, but the conflict between the US and Iran could lead to a blockade of important transport routes and make energy prices noticeably more expensive. This would weaken households’ purchasing power and shake one of the last remaining pillars of the global economy.
Claus Michelsen is head of the Forecasting and Economic Policy Department
at DIW Berlin | [email protected]
Guido Baldi is a guest researcher in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Geraldine Dany-Knedlik is a research associate in the Forecasting and
Economic Policy Department at DIW Berlin | [email protected]
Hella Engerer is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Stefan Gebauer is a research associate in the Forecasting and Economic
Policy Department at DIW Berlin | [email protected]
Malte Rieth is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Thore Schlaak is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
JEL: E32, E66, F01
Keywords: Business cycle forecast, economic outlook
Figure
World real GDP growthQuarter-on-quarter, in percent
3.8 4.3 4.2 3.7 3.6 3.5
−1
0
1
2
3
4
5
6
2016 2017 2018 2019 2020 2021
Emerging markets
World average (year-on-year growth rate in percent)
Advanced economies
Forecast
Sources: National statistical offices; DIW autumn projections 2019.
© DIW Berlin 2019
Global growth is slowing down.
Table
Real GDP, consumer price inflation, and unemployment rate in the world economyIn percent
GDP Consumer pricesUnemployment rate in percent
Change over previous year in percent
2018 2019 2020 2021 2018 2019 2020 2021 2018 2019 2020 2021
Euro area 1.7 1.0 1.2 1.4 1.8 1.3 1.5 1.5 8.2 7.7 7.5 7.5
without Germany 1.7 1.2 1.3 1.4 1.8 1.3 1.4 1.4 10.4 9.8 9.7 9.7
France 1.7 1.3 1.4 1.4 1.8 1.3 1.5 1.4 9.1 8.5 8.2 8.1
Italy 0.7 0.1 0.5 0.9 1.2 0.9 1.1 1.3 10.6 10.5 10.5 10.6
Spain 2.6 2.2 1.8 1.8 1.7 1.1 1.5 1.6 15.3 14.1 13.9 13.8
Netherlands 2.5 1.8 1.6 1.7 1.6 2.4 1.5 1.6 3.9 3.4 3.6 3.7
United Kingdom 1.4 1.2 1.2 1.7 2.4 1.9 2.0 2.1 4.2 4.0 4.1 4.2
USA 2.9 2.3 1.8 1.5 2.4 1.8 2.1 1.9 3.9 3.7 3.5 3.5
Japan 0.8 1.1 0.5 0.8 0.8 0.8 1.1 0.9 2.5 2.4 2.3 2.3
South Korea 2.7 2.0 2.4 2.0 1.5 0.9 2.6 2.7 3.8 3.5 3.0 3.0
East-central Europe 4.5 4.0 3.4 3.5 2.2 2.9 3.0 3.0 3.7 3.5 3.5 3.5
Turkey 2.7 0.0 2.5 2.6 16.4 17.8 17.3 15.6 11.0 13.7 13.5 13.5
Russia 2.0 1.4 1.9 1.8 2.7 4.7 4.0 4.1 4.8 4.5 4.3 4.3
China 6.5 6.2 5.8 5.7 1.6 2.2 2.1 2.2 3.9 3.7 3.8 3.8
India 7.4 6.6 6.4 6.1 3.9 5.5 6.1 6.1
Brazil 1.1 0.4 0.9 1.3 3.7 4.7 6.5 7.0 12.3 9.2 6.2 4.0
Mexico 2.0 0.8 1.4 1.1 4.9 4.2 3.2 3.2 3.3 4.5 4.8 4.8
Developed economies 2.2 1.7 1.5 1.4 2.0 1.6 1.9 1.7 4.8 4.5 4.4 4.4
Emerging markets 5.5 4.9 4.9 4.8 3.2 4.1 4.4 4.5 5.0 4.8 4.6 4.4
World 4.2 3.7 3.6 3.5 2.7 3.1 3.4 3.4 4.9 4.7 4.5 4.4
Sources: National statistical offices; DIW autumn projections 2019.
© DIW Berlin 2019
330 DIW Weekly Report 37/2019
GERMAN ECONOMY
ABSTRACT
The slowdown in the global economy and the uncertainties
caused by Brexit have affected the export-oriented German
economy, which is expected to grow by only 0.5 percent this
year. However, the German economy has not slid into a crisis
due to marked fiscal policy stimuli and favorable develop-
ments on the labor market. Private consumption remains a
mainstay of the economy; in addition, there is moderate infla-
tion, which will barely dampen purchasing power over the next
two years. Together with slightly stronger foreign demand,
these factors will ensure that the German economy recovers
somewhat over next year and the year thereafter. The econ-
omy is likely to grow by 1.4 percent in 2020 and 2021 as long as
the serious political risks do not materialize. A no-deal Brexit,
for example, would reduce growth in Germany by 0.4 percent
in 2020.
The German economy is currently experiencing a period of weakness. After the export-driven booms in 2016 and 2017, a noticeable slowdown began in 2018, which initially seemed to be triggered by temporary factors in the automotive sec-tor. However, it is now clear that the industry is facing big-ger problems. Global demand for capital goods is weak, neg-atively affecting the export-oriented German economy in par-ticular (see Figure). Industrial production has been declining for a year now, causing Germany to slide into a recession in the second half of the year.
Despite a strong start to the year, GDP will only grow by 0.5 percent1 in 2019 and be roughly equal to its production potential. The phase of high capacity utilization will end. Over the next two years, the economy should be operating at roughly normal capacity. Companies are less confident across the board. The industrial downturn is now also affecting the service sector, as it is reducing demand for business-related services and, through weaker employment growth, is put-ting pressure on consumer-related sectors.
The global economic slowdown and uncertainties relating to Brexit and trade conflicts are the primary reasons the German economy has weakened. Demand for German exports is likely to remain below average over the forecast period (Table 1). Employment growth will also continue, albeit at a slower pace. Following last year’s increase in employment of over 600,000 persons, this year’s increase will slow to just under 400,000; over the next two years it will be around 200,000 each year. Weaker economic development as well as short-ages in the labor market are leading to lower employment growth and preventing stronger growth. The unemployment rate this year is expected to be five percent and will sink to 4.9 percent and 4.7 percent, respectively, over the next two years while wages will continue to rise strongly.
1 The 68-percent confidence interval resulting from the forecast errors of the previous five years is be-
tween 0.0 and 0.9 percent for this year and between 0.9 and 1.8 percent for next year.
German economy: a recession is not automatically a crisisBy Claus Michelsen, Marius Clemens, Max Hanisch, Simon Junker, Konstantin Kholodilin und Thore Schlaak
DOI: https://doi.org/10.18723/diw_dwr:2019-37-3
331DIW Weekly Report 37/2019
GERMAN ECONOMY
Table 1
Use of GDP, quarter-on-quarter growth ratesPrice, seasonally and working-day adjusted, in percent
2019 2020 2021
I II III IV I II III IV I II III IV
Private consumption 0.8 0.1 0.3 0.2 0.7 0.4 0.3 0.3 0.7 0.5 0.3 0.3
Public consumption 0.8 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4
Gross fixed capital formation 1.6 −0.1 0.2 0.5 0.9 0.8 0.6 0.6 0.9 0.7 0.5 0.5
Investment in machinery and equipment 2.5 −1.0 0.6 0.8 0.8 0.8 0.5 0.5 0.8 0.8 0.3 0.4
Construction investment 1.4 0.6 −0.9 0.0 0.8 0.6 0.6 0.6 0.9 0.6 0.6 0.6
Other investment −0.6 1.0 0.9 0.8 1.1 0.9 0.8 0.8 1.1 0.8 0.8 0.8
Change in inventories1 −1.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Domestic uses −0.1 0.5 0.3 0.3 0.7 0.5 0.4 0.4 0.7 0.5 0.4 0.3
Net Exports1 0.5 −0.5 −0.4 −0.1 −0.2 −0.1 −0.1 0.0 −0.2 −0.2 −0.1 0.0
Exports 1.8 −1.3 −0.4 0.6 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.4
Imports 0.9 −0.3 0.5 0.8 1.2 0.9 0.6 0.5 1.0 0.8 0.6 0.5
Gross domestic product 0.4 −0.1 −0.2 0.2 0.4 0.3 0.3 0.3 0.5 0.4 0.3 0.3
Gross value added 0.4 −0.3 −0.1 0.2 0.4 0.3 0.3 0.3 0.5 0.3 0.3 0.3
Manufacturing −1.0 −1.4 −1.0 0.2 0.5 0.5 0.5 0.5 0.6 0.5 0.5 0.5
Construction 1.1 −0.5 0.5 0.8 0.8 0.8 0.5 0.5 0.7 0.7 0.4 0.4
Trade, accomodation, transport 2.3 −0.6 0.5 0.2 0.7 0.5 0.4 0.4 1.0 0.6 0.4 0.4
Business and production services 0.7 0.0 −0.2 0.0 0.7 0.4 0.4 0.4 0.5 0.4 0.4 0.4
Public admin., community and social serv. −0.2 0.4 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1
1 Contribution to GDP growth in percentage points.
Source: Federal Statistical Office; DIW Berlin, forecast from 2019 Q3 onward.
© DIW Berlin 2019
Table 2
Key economic indicators for the German economy
2016 2017 2018 2019 2020 2021
Real GDP1 (percent change over previous year) 2.2 2.5 1.5 0.5 1.4 1.4
Domestic employment (1 000 persons) 43,655 44,248 44,854 45,244 45,428 45,635
Unemployed (ILO concept) 1,775 1,621 1,469 1,359 1,313 1,206
Unemployed (BA concept) 2,691 2,533 2,340 2,271 2,269 2,165
Unemployment rate2 (ILO concept) 4.1 3.8 3.4 3.1 3.0 2.7
Unemployment rate2 (BA concept) 6.1 5.7 5.2 5.0 4.9 4.7
Consumer prices 0.5 1.5 1.8 1.4 1.6 1.6
Unit labor costs3 1.2 1.2 2.5 3.5 1.7 1.7
Government budget balance4
in billion EUR 37.1 40.3 62.4 47.9 33.3 9.6
in percent of GDP 1.2 1.2 1.9 1.4 0.9 0.3
Current account balance, in percent of GDP 8.5 8.1 7.3 7.0 6.3 5.7
1 Price-adjusted, chain-linked.2 As a share of domestic labor force (ILO), resp. Civilian labor force (BA).3 Compensation of employees (national concept) per hour worked over real GDP.4 According to ESA 2010.
Sources: National and international institutions; computations by DIW Berlin; 2018 to 2020: DIW forecast.
© DIW Berlin 2019
332 DIW Weekly Report 37/2019
GERMAN ECONOMY
Figure
GDP and use of GDPSeasonally and working-day adjusted
Forecast
Forecast
ForecastForecast
Forecast
1. GDP 2. Private consumption
3. Exports
5. Investment in machinery and equipment 6. Investment in construction
4. Imports
−0.8
−0.4
0.0
0.4
0.8
1.2
1.6
720
740
760
780
800
820
840
2016 2017 2018 2019 2020 2021
−0.4
−0.2
0.0
0.2
0.4
0.6
0.8
1.0
380
390
400
410
420
430
440
450
2016 2017 2018 2019 2020 2021
−2.0
−1.0
0.0
1.0
2.0
3.0
330
350
370
390
410
430
2016 2017 2018 2019 2020 2021
−2.4
−1.2
0.0
1.2
2.4
3.6
280
300
320
340
360
380
2016 2017 2018 2019 2020 2021
−4.0
−3.0
−2.0
−1.0
0.0
1.0
2.0
3.0
50
52
54
56
58
60
62
64
2016 2017 2018 2019 2020 2021
−2.4
−1.6
−0.8
0.0
0.8
1.6
2.4
3.2
60
64
68
72
76
80
84
88
2016 2017 2018 2019 2020 2021
Forecast
2.2 2.5 1.5 0.5 1.4 1.4 2.3 1.3 1.3 1.4 1.7 1.7
2.4 4.9 2.1 0.7 1.9 1.6 4.3 5.2 3.6 2.6 3.7 2.9
3.0 4.0 4.4 1.8 2.6 2.9 3.8 0.7 2.5 3.9 3.3 2.6
Year-on-year growth rate in percent (non-adjusted)
Chained volumes, billions of euros (left-hand axis) Quarter-on-quarter growth rate (right-hand axis)
Sources: Federal Statistical Office; Computations by DIW Berlin 2019, forecasts as of 2019 Q3.
© DIW Berlin 2019
333DIW Weekly Report 37/2019
GERMAN ECONOMY
Overall, disposable income is growing solidly and supports private consumption, which is in turn supported largely by numerous fiscal policy measures implemented over the fore-cast period. At the beginning of 2019, reducing the bracket creep and reintroducing equally shared financing of statu-tory health insurance contributions had raised the net sal-aries of employees and contributed to a strong increase in private consumption. Further measures with tangible effects will be taken in the forecast period; in particular, the partial reduction of the solidarity tax in 2021 will increase income. The expected increase in consumption will make a noticeable contribution to domestic economic output as well, although a good portion will probably also be covered by imports. This increase is another reason why GDP growth in the coming two years will be higher than in 2019; at 1.4 percent each, it is likely to be slightly lower than potential growth. Due
to the additional imports, net exports are declining signifi-cantly and the still high current account surplus is declin-ing accordingly: from 7.0 percent this year to 6.3 percent in 2020 and 5.7 percent in 2021 (see Table 2).
Private investment in equipment and machinery continues to suffer from the high economic uncertainty and remains restrained initially due to lower capacity utilization. However, with foreign demand rising slightly and probably decreas-ing uncertainty, investment will likely begin to recover; gov-ernment measures will also contribute to this.2
2 Marius Clemens, Marius Goerge, and Claus Michelsen, “Öffentliche Investitionen sind wichtige Voraus-
setzung für privatwirtschaftliche Aktivität,” DIW Wochenbericht no. 31 (2019): 537–543 (in German; avail-
able online; accessed on September 6, 2019. This applies to all other online sources in this report unless
stated otherwise.).
JEL: E32, E66, F01
Keywords: Business cycle forecast, economic outlook
Claus Michelsen is head of the Forecasting and Economic Policy Department
at DIW Berlin | [email protected]
Marius Clemens is a research associate in the Forecasting and Economic
Policy Department at DIW Berlin | [email protected]
Max Hanisch is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Simon Junker is deputy head of the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]
Konstantin Kholodilin is a research associate in the Macroeconomics
Department at DIW Berlin | [email protected]
Thore Schlaak is a research associate in the Forecasting and Economic Policy
Department at DIW Berlin | [email protected]